Posts Tagged Actio Pauliana

Vinyls Italia: Szpunar AG on the chemistry between the Insolvency Regulation and Rome I. And again, on the pauliana.

In C-54/16 Vinyls Italia (in full: Vinyls Italia SpA, in liquidation v Mediterranea di Navigazione SpA) Szpunar AG opined last week (the Opinion is not available in English). At the core of the case is the application of Article 13 of the Insolvency Regulation 2000 (Article 16 in the 2015 version; see my general review here), however the case opens an interesting discussion on the meaning of ‘international’ in ‘private international law’.

For the general context of Article 13 (16 new) I should like to refer to my review of Lutz and Nike. At issue in the case at hand are payments made by Vinyls to Mediterranea for the transport of chemicals of the former by the latter. Both are Italian registered companies. Shipment was presumably carried out in Italy (an extra-Italian element in the actual transport does not feature in the factual analysis re ‘international’, which I refer to below). However the contract made choice of law in favour of English law. Mediterranea makes recourse to Article 13 juncto English law as the lex contractus to ward off an attempt by Vinyls to have the payments return to its books.

First up is the question whether courts should apply Article 13 ex officio: for Mediterranea’s claim was made after the procedural deadline foreseen by Italian law. Szpunar AG in my view justifiably suggest it does not: he refers to the Virgos Schmit report [„Article 13 represents a defence against the application of the law of the State of the opening, which must be pursued by the interested party, who must claim it” – § 136 of that report, para 43 of the AG’s Opinion) and to the CJEU’s finding in C-310/14 Nike at 26. The AG does point to the particulars of the case: Mediterranea seemingly had provided proof supporting its view that the substantial conditions of Article 13 had been met (in particular an expert opinion by an English lawyer) but had not expressis verbis requested its application. Szpunar refers the final say to the Italian court, which needs to judge on the basis of Italian civil procedure however does suggest that it seems fairly inconceivable to have provided proof for the fulfillment of a legal proviso, without meaning to request its application.

The question on the applicability of Rome I at all (which is required if Mediterranea want to make recourse to the provisions of English law as lex contractus per Rome I or the Rome convention) may not make it to the CJEU. As Szpunar AG notes, the underlying contract dates prior to 17 December 2009, which is the cut-off date of the Rome I Regulation. The referring court being a court of first instance, it is not in a position to request preliminary review of Rome I’s predecessor, the 1980 Rome Convention. The AG completes the analysis anyway (the Court itself will not, should it find Rome I not to be applicable) and takes in my view the right, expansionist approach (one which I also defend in my handbook): especially given the presence of Article 3(3)’s proviso for ‘purely domestic’ contracts, it is clear that it suffices for Rome I to be applicable that parties make choice of court in favour of a foreign law. Further in the opinion (137 ff) he also suggests that such application is not tantamount to fraude a la loi (fraus legis) and again I agree: the relevance of fraus has been seriously diminished by the provisions on party autonomy in both Rome I and the Rome Convention.

The use of choice of law per Rome I (or the Convention) in turn serves as a jack to trigger the application of the insolvency Regulation. That too is correct in my view, and with undramatic consequences. Choice of law for the underlying contract only identifies its lex causae (where relevant, with an impact on Article 13 of the Insolvency Regulation). It does does not of course in and of itself determine the lex concursus: the latter is determined by the Insolvency Regulation once /if insolvency occurs. Parties have no means to manipulate this at the time of the formation of the contract.

Exciting, conceptual stuff. Most probably the Court itself will not be in a position to assess it all.

Geert.

(Handbook of) EU Private International Law, 2nd ed. 2016, Chapter 3, Heading 3.2.1; Heading 3.2.8.1; chapter 5; Heading 5.7.1.

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Consenting to choice of court under the common law. The Privy Council in Vizcaya v Picard.

In Vizcaya v Picard, the Privy Council considered the issue of consent to a choice of court clause in the event no such choice has been made verbatim. It was alleged that choice of court had been made implicitly but clearly by reference to an applicable law agreement in the underlying contract. RPC have a review of the case on their blog and I am grateful to them for bringing it to my attention.

The case is a fall-out of the Bernard Madoff Ponzi scheme, carried out through Mr Madoff’s company Bernard L Madoff Investment Securities LLC (“BLMIS”), a New York corporation. After Madoff’s fraud came to light in 2008, Irving Picard (“the trustee”) was appointed as trustee in BLMIS’s liquidation in the US Bankruptcy Court for the Southern District of New York (“the New York BankruptcyCourt”). The trustee commenced proceedings under the anti-avoidance provisions of the US Bankruptcy Code against investors who had been repaid before the fraud was discovered, including the appellant, Vizcaya Partners Limited (“Vizcaya”), a BVI (British Virgin Islands) company which carried on business as an investment fund, and which invested about US$328m with BLMIS between January 2002 and December 2008, but was repaid US$180m before the fraud was discovered.

The Appeal before the Privy Council concerns primarily the content and scope of the rule in common law that a foreign default judgment is enforceable against a judgment debtor who has made a prior submission to the jurisdiction of the foreign court (as distinct from a submission by appearance in the proceedings).  Brussels I or the Recast was not applicable to the case. In that Regulation (Article 25), the expression of consent with choice of court must take one of thee forms: essentially: written (or oral but confirmed by written agreement); in accordance with lex mercatoria; or in accordance with established business practice simply between the parties.

The question in the case at issue is whether the agreement to submit must be express, or can also be implied or inferred. The Privy Council settled the uncertainty which would seem to have existed for some time in the common law, in favour of an answer in the affirmative. Consent to jurisdiction can be implied. What needs to be shown though is real ‘agreement’, or ‘consent’ (in European private international law with respect to the similar discussion re choice of law (Rome I) I would say the test is one of ‘clearly established’), quod non in casu. Choice of law (here: in favour of New York law) can be a factor but not a solely determinant one. Moreover, choice of court viz one’s business transactions does not imply automatic extension to insolvency proceedings.

Crucial precedent, it would seem. Geert.

European private international law, second ed. 2016, Chapter 2, Heading 2.2.9

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Not quite HoHoHo (yet): OOO PROMNEFTSTROY v Yukos: Insolvency and conflict of laws in the Dutch Supreme Court.

Granted, the (bad) pun in the title would have worked better around the end of year, which is when I had originally planned this posting, before I got sidetracked. Bob Wessels has excellent overview here (including admirably swift and exact translation of core parts of the judgment). OOO PROMNEFTSTROY v Yukos at the Dutch Supreme Court is but one instalment in running litigation literally taking place across the globe.

Of particular interest to the blog is the court’s finding (at 3.4.2) that the existence of a corporation is subject to the lex incorporationis not, as the Court of Appeal had held, the lex concursus in the event of insolvency. The EU’s Insolvency Regulation does not apply for COMI is not within the EU. The Insolvency Regulation does not in so many words say the same as the Dutch Supreme Court however it is likely that under the EIR, too, this issue falls under lex societatis /lex incorporationis (see e.g. Miguel Virgos & Francisco Garcimartin, The European Insolvency Regulation: Law and Practice, Kluwer, 2004, p.82 (par 123, f: dissolution of the company).

One can imagine of course the one or two complications arising out of the seizure of assets of a company which no longer exists.

Geert.

European private international law, second ed. 2016, Chapter 5, Heading 5.7

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Just prove it! CJEU on lex causae and detrimental acts (pauliana) in Nike.

Postscript for an example of where Article 4(2)m, lex fori concursus for rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors, applies without correction, see C-594/14 Kornhaas.

In my posting on Lutz I flagged the increasing relevance of Article 13 of the Insolvency Regulation. This Article neutralises the lex concursus in favour of the lex causae governing the act between a person (often a company) benefiting from an act detrimental to all the creditors, and the insolvent company. Classic example is a payment made by the insolvent company to one particular creditor. Evidently this is detrimental to the other creditors, who are confronted with reduced means against which they can exercise their rights. Article 13 reads

Detrimental acts. Article 4(2)(m) shall not apply where the person who benefited from an act detrimental to all the creditors provides proof that: – the said act is subject to the law of a Member State other than that of the State of the opening of proceedings, and – that law does not allow any means of challenging that act in the relevant case.

In the case at issue, C-310/14, Nike (incorporated in The Netherlands) had a franchise agreement with Sportland Oy, a Finnish company. This agreement is governed by Dutch law (through choice of law). Sportland paid for a number of Nike deliveries. Payments went ahead a few months before and after the opening of the insolvency proceedings. Sportland’s liquidator attempts to have the payments annulled, and to have Nike reimburse.

Under Finnish law, para 10 of the Law on recovery of assets provides that the payment of a debt within three months of the prescribed date may be challenged if it is paid with an unusual means of payment, is paid prematurely, or in an amount which, in view of the amount of the debtor’s estate, may be regarded as significant. Under Netherlands law, according to Article 47 of the Law on insolvency (Faillissementswet), the payment of an outstanding debt may be challenged only if it is proven that when the recipient received the payment he was aware that the application for insolvency proceedings had already been lodged or that the payment was agreed between the creditor and the debtor in order to give priority to that creditor to the detriment of the other creditors.

Nike first of all argued, unsuccessfully in the Finnish courts, that the payment was not ‘unusual’. The Finnish courts essentially held that under relevant Finnish law, the payment was unusual among others because the amount paid was quite high in relation to the overall assets of the company. Nike argues in subsidiary order that Dutch law, the lex causae of the franchise agreement, should be applied. Attention then focussed (and the CJEU held on) the burden of proof under Article 13, as well as the exact meaning of ‘that law does not allow any means of challenging that act in the relevant case.

Firstly, the Finnish version of the Regulation seemingly does not include wording identical or similar to ‘in the relevant case‘ (Article 13 in fine). Insisting on a restrictive interpretation of Article 13, which it had also held in Lutz, the CJEU held that all the circumstances of the cases need to be taken into account. The person profiting from the action cannot solely rely ‘in a purely abstract manner, on the unchallengeable character of the act at issue on the basis of a provision of the lex causae‘ (at 21).

Related to this issue the referring court had actually quoted the Virgos Schmit report, which reads in relevant part (at 137) ‘By “any means” it is understood that the act must not be capable of being challenged using either rules on insolvency or general rules of the national law applicable to the act’. This interpretation evidently reduces the comfort zone for the party who benefitted from the act. It widens the search area, so to speak. It was suggested, for instance, that Dutch law in general includes a prohibition of abuse of rights, which is wider than the limited circumstances of the Faillissementswet, referred to above.

The CJEU surprisingly does not quote the report however it does come to a similar conclusion: at 36: the expression ‘does not allow any means of challenging that act …’ applies, in addition to the insolvency rules of the lex causae, to the general provisions and principles of that law, taken as a whole.’

Attention then shifted to the burden of proof: which party is required to plead that the circumstances for application of a provision of the lex causae leading to voidness, voidability or unenforceability of the act, do not exist? The CJEU held on the basis of Article 13’s wording and overall objectives that it is for the defendant in an action relating to the voidness, voidability or unenforceability of an act to provide proof, on the basis of the lex causae, that the act cannot be challenged. Tthe defendant has to prove both the facts from which the conclusion can be drawn that the act is unchallengeable and the absence of any evidence that would militate against that conclusion (at 25).

However, (at 27) ‘although Article 13 of the regulation expressly governs where the burden of proof lies, it does not contain any provisions on more specific procedural aspects. For instance, that article does not set out, inter alia, the ways in which evidence is to be elicited, what evidence is to be admissible before the appropriate national court, or the principles governing that court’s assessment of the probative value of the evidence adduced before it.

‘(T)he issue of determining the criteria for ascertaining whether the applicant has in fact proven that the act can be challenged falls within the procedural autonomy of the relevant Member State, regard being had to the principles of effectiveness and equivalence.’ (at 44)

The Court therefore once again bumps into the limits of autonomous interpretation. How ad hoc, concrete (as opposed to ‘in the abstract’: see the CJEU’s words, above) the defendant has to be in providing proof (and foreign expert testimony with it), may differ greatly in the various Member States. Watch this space for more judicial review of Article 13.

Geert.

Postscript 7 December 2015: Bob Wessels has annotated the case here.

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Lex causae, securitisation and insulating agreements from the lex concursus. The ECJ in Lutz.

Postscript for an example of where Article 4(2)m, lex fori concursus for rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors, applies without correction, see C-594/14 Kornhaas.

This post has been some time in the making, notwithstanding my promise to have it up soon. Let’s just say I got distracted. The wide interest in Lutz, Case C-557/13, illustrates the increasing relevance of the actio pauliana in protecting creditors from their debtor’s insolvency. The core underlying issue for Lutz is that, in the absence of considerable capital in companies (arguably a direct result indeed of the regulatory competition in Member States’ corporate law following the ECJ’s case-law on freedom of establishment), civil law mechanisms have become more relevant than classic recourse to companies’ liability. If one relies on more classic modes of securitisation, one may want to have more predictability in what law will apply to those securitised agreements. That is where the Insolvency Regulation comes in, in providing for a mechanism which allows parties to indeed give parties the freedom to choose applicable law for the relevant agreements. Article 4(2)m of the Insolvency Regulation (in the new Regulation this is Article 7(m) – unchanged) makes the lex concursus applicable in principle: lex concursus applies to ‘(m) the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors.’ However Article 13 (16 new – unchanged) insulates a set of agreements from the pauliana: ‘Article 4(2)(m) shall not apply where the person who benefited from an act detrimental to all the creditors provides proof that: – the said act is subject to the law of a Member State other than that of the State of the opening of proceedings, and – that law does not allow any means of challenging that act in the relevant case.’  The crucial consideration in Lutz was whether the absence of means of challenge in the lex causae, relates to substantive law only, or also to procedural law. Randi summarise the time-line and relevant distinction in German and Austrian law as follows:

  • “17 Mar 2008-Austrian court issues an enforceable payment order in favour of Mr Lutz against the debtor company
  • 18 April 2008-debtor files application for German insolvency proceedings
  • 20 May 2008-attachment of three Austrian bank accounts of the company
  • 4 August 2008-German insolvency proceedings opened (as main proceedings) in respect of the company
  • 17 Mar 2009-Austrian bank pays monies to Mr Lutz

Under German law, any enforcement of security over the debtor’s assets during the month preceding the lodging of the application to open proceedings is legally invalid once proceedings are opened. Under Austrian law, an action to set aside a transaction must be brought within one year after the opening of proceedings, failing which it becomes time-barred. By contrast, the limitation period under German law is three years. Although the attachment order was granted before the application to open main proceedings was filed, the actual attachment itself took place after that filing and the subsequent payment of monies by the bank took place after main proceedings were opened in Germany. Mr Lutz argued that art 13 applied and that the payment could no longer be challenged by the German liquidator under Austrian law as the one-year limitation period had expired.” (Randi also have good review of the questions in Lutz relating to rights in rem and Article 5, triggered in the case at issue by the attachments of bank accounts). Essentially, the Court expresses sympathy for the cover of procedural limits to fighting detrimental acts to be determined by the lex causae. (It dismissed any relevance of Article 12(1)d of Rome I Regulation, which provides that prescription and limitation of actions are governed by ‘the law applicable to a contract’: for the Insolvency Regulation is most definitely lex specialis). However leaving the matter up to the lex causae would cause differentiated application of the Insolvency Regulation across the Member States. Consequently the ECJ opts for autonomous interpretation, ruling (at 49) that Article 13 of Regulation No 1346/2000 must be interpreted as meaning that the defence which it establishes also applies to limitation periods or other time-bars relating to actions to set aside transactions under the lex causae.’ The ECJ’s judgment essentially confirms the EFTA Court’s views on the similar proviso in Directive 2001/24 on the winding-up of credit institutions (Lbi hf v Merrill Lynch). A pity the ECJ did not refer to that finding. Geert.

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Schmid v Hertel: ECJ confirms ‘extraterritorial’ reach of insolvency Regulation’s Seagon extension – Actio Pauliana

(Postscript April 2015: The ECJ confirmed these principles in C-295/13, H v HK).

Less is more, I know – Apologies for the long title and thank you to Matthias Storme for highlighting the case. In Case C-328/12 Ralph Schmid v Lilly Hertel, Schmid was the German liquidator of the debtor’s assets, appointed in the insolvency proceedings opened in her regard in Germany on 4 May 2007. The defendant, Ms Hertel, resides in Switzerland. Mr Schmid brought an action against Ms Hertel before the German courts to have a transaction set aside, seeking to recover EUR 8 015.08 plus interest as part of the debtor’s estate.

In Case C-339/07 Seagon the ECJ had ruled that the courts of the Member State within the territory of which insolvency proceedings have been opened have jurisdiction to decide an action to set a transaction aside (actio pauliana) that is brought against a person whose registered office is in another Member State. However does Seagon also apply where insolvency proceedings have been opened in a Member State, but the place of residence or registered office of the person against whom the action to have a transaction set aside is brought is not in a Member State, but in a third country?

The ECJ held that it does. Bob Wessels has a very good analysis here and I am happy to refer. Let me just add one or two things. The Brussels I Regulation, the overall Regulation on jurisdiction on civil and commercial matters, displays bias in favour of the defendant: actor sequitur forum rei. The overall jurisdictional angle of the Insolvency Regulation is different: avoiding forum shopping to the detriment of creditors is its main aim, and its insistence on verifiable and predictable criteria to determine COMI (which in turns determines jurisdiction) needs to be seen in that light. That non-EU domiciled defendants get caught up in EU proceedings on the basis of COMI is not generally seen as problematic within the context of the Regulation.

The ECJ is rather realistic with respect to the potential recognition and enforcement problems associated with judgments under the Regulation held against non-domicileds. In the absence of assets in the EU held by the non-dom (if there were, enforcement would be straightforward), classic bilateral treaties may come to the rescue and if there is no such treaty, so be it: the Regulation’s jurisdictional rules should not be held up by potential problems end of pipe.

An important judgment for the reach of the Insolvency Regulation.

Geert.

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